What to Know About FHA Adjustable Rate Mortgages
October 8, 2023
FHA adjustable rate mortgages, also known as FHA ARM loans for short, are a way to avoid paying higher interest rates in the earliest days of the mortgage.
For qualified borrowers, the introductory rate on an FHA ARM loan is typically lower than the going rate for a fixed-rate mortgage.
The introductory rate eventually expires. When it does, it depends on whether you select a one-year ARM, a 3-year ARM, or one with an intro rate up to 10 years long. What else must you know about adjustable rate mortgages before committing to one?
The Initial Advantages of an FHA ARM
The lower introductory rate is the big draw for those who choose ARM loans. When rates begin to adjust after the initial period expires, your costs may go higher or lower depending on which direction rates are headed at the time.
Borrowers who get a one-year ARM loan in 2023 should likely expect their interest rates to rise following the expiration of the lower rate, which is why it is smart to have a refinance strategy in mind for when that rate expires.
Some want to know if they can refinance into another ARM loan. FHA loan rules permit an ARM-to-ARM refinance (our term, not the FHA’s), but you must ask a participating lender about this option. Some may or may not offer it, depending on circumstances. Some may or may not qualify for this option, but it is always worth it to ask.
Drawbacks to Refinancing into Another ARM Loan
When you refinance into another ARM loan, you reset the clock on a 15-year or 30-year mortgage. If your goal is to lower your monthly mortgage payment and not to save money over the full term of the loan, this detail might not bother you.
But it is worth noting that refinancing into another ARM does create another situation where you must refinance before the intro rate expires. It pays to ask an FHA lender about the maximum intro rate possible for your mortgage.
Do you have to accept a one-year ARM? Or can you apply for the maximum 10-year version?
Getting the longest introductory rate possible on the first loan is best, but if you choose to refinance into another ARM loan, try to get a longer initial rate. There is a good reason for this.
When it’s time to refinance again, if mortgage rates have fallen below when you got the last loan, you may qualify for an FHA streamline refinance with no FHA-required credit check or appraisal.
The basic goal of an FHA streamline is to provide a benefit to the borrower, and one of those benefits is getting out of an ARM loan into a more predictable fixed-rate mortgage. Streamline refinances don’t make sense in 2023 because rates are much higher than when many got their first mortgage.
Only when rates fall closer to “normal” does a streamline refinance make sense, but ask your lender about the option anyway. You can file that information away for later.
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RELATED VIDEOS:
What Is an FHA Loan?
Using an FHA Loan Calculator
Meeting FHA Loan Guidelines Improves Your Chances
For qualified borrowers, the introductory rate on an FHA ARM loan is typically lower than the going rate for a fixed-rate mortgage.
The introductory rate eventually expires. When it does, it depends on whether you select a one-year ARM, a 3-year ARM, or one with an intro rate up to 10 years long. What else must you know about adjustable rate mortgages before committing to one?
The Initial Advantages of an FHA ARM
The lower introductory rate is the big draw for those who choose ARM loans. When rates begin to adjust after the initial period expires, your costs may go higher or lower depending on which direction rates are headed at the time.
Borrowers who get a one-year ARM loan in 2023 should likely expect their interest rates to rise following the expiration of the lower rate, which is why it is smart to have a refinance strategy in mind for when that rate expires.
Some want to know if they can refinance into another ARM loan. FHA loan rules permit an ARM-to-ARM refinance (our term, not the FHA’s), but you must ask a participating lender about this option. Some may or may not offer it, depending on circumstances. Some may or may not qualify for this option, but it is always worth it to ask.
Drawbacks to Refinancing into Another ARM Loan
When you refinance into another ARM loan, you reset the clock on a 15-year or 30-year mortgage. If your goal is to lower your monthly mortgage payment and not to save money over the full term of the loan, this detail might not bother you.
But it is worth noting that refinancing into another ARM does create another situation where you must refinance before the intro rate expires. It pays to ask an FHA lender about the maximum intro rate possible for your mortgage.
Do you have to accept a one-year ARM? Or can you apply for the maximum 10-year version?
Getting the longest introductory rate possible on the first loan is best, but if you choose to refinance into another ARM loan, try to get a longer initial rate. There is a good reason for this.
When it’s time to refinance again, if mortgage rates have fallen below when you got the last loan, you may qualify for an FHA streamline refinance with no FHA-required credit check or appraisal.
The basic goal of an FHA streamline is to provide a benefit to the borrower, and one of those benefits is getting out of an ARM loan into a more predictable fixed-rate mortgage. Streamline refinances don’t make sense in 2023 because rates are much higher than when many got their first mortgage.
Only when rates fall closer to “normal” does a streamline refinance make sense, but ask your lender about the option anyway. You can file that information away for later.
------------------------------
RELATED VIDEOS:
What Is an FHA Loan?
Using an FHA Loan Calculator
Meeting FHA Loan Guidelines Improves Your Chances
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